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Marketmind: Booming stocks step back as PCE hoves into view

[February 26, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

Chastened interest rates markets are now inclined to doubt there will be any U.S. monetary easing in the first half of this year, prompting a minor stepback in record high stock indexes into a new week dominated by the latest critical inflation update.

Before we get to the Federal Reserve's favored PCE price gauge release on Thursday, U.S. Treasury yields slipped back somewhat - ahead of 2- and 5-year debt auctions later in the day and partly soothed by ebbing crude oil prices.

What's more, bonds are keeping half an eye on the latest juncture in the long-running U.S. government funding standoff. The money is due to run out again on Friday for some federal agencies, including the Department of Transportation, while others like the Defense Department face a March 8 deadline.

President Joe Biden plans to meet with congressional leaders on Tuesday to discuss funding the government. Last week hardline U.S. House Republicans asked Speaker Mike Johnson to abandon talks with Senate Democrats on legislation that might avoid that shutdown and instead implement an automatic spending cut.

The upshot at the start of the week is that 10-year Treasury yields slipped back to an 11-day low of 4.21% - more than 10 basis points off Friday's early peaks.

Futures markets are now not fully priced for a quarter-point Fed rate cut until July, with as little as 83 bps in the easing curve for the whole year - close to the 75 bps of cuts Fed policymakers themselves indicated in December.

Thursday's January PCE release will be critical this week - with traders watching closely to see if the upside surprise seen in the consumer price index for the same month is replicated, underlining Fed caution about the timing of rate cuts.

Even though year-on-year headline and 'core' PCE inflation rates are forecast to slip to 2.4% and 2.8% respectively, monthly rates are expected to be a brisk 0.3% and 0.4% - stalling some of disinflationary momentum that recently saw 6-month annualized rates slip below the Fed's 2% target.

The retreat in crude oil prices will help calm the horses a bit - falling to an 11-day low early on Monday on a mix of robust inventories, a firm dollar, worries about overseas demand and some hopes of a breakthrough in Middle East talks.

The year-on-year crude price slipped back negative again too after 10 days with a plus sign attached.

White House national security adviser Jake Sullivan told CNN on Sunday that negotiators for the United States, Egypt, Qatar and Israel had agreed on the basic contours of a Gaza hostage deal during talks in Paris. Israel's Prime Minister Benjamin Netanyahu, however, said it was not clear yet whether a deal would materialize.

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 1, 2024. REUTERS/Brendan McDermid/File Photo

The dollar was steady for the most part, gaining on China's offshore yuan. But the euro gained ground even as this Friday's release of 'flash' euro zone inflation is expected to show 'core' rates there falling below 3% for the first time in two years.

Record high stocks held most of last week's spectacular gains, driven mostly by the latest bout of excitement about artificial intelligence as chipmaker Nvidia soared again following another blowout earnings report.

Futures were off a touch, but the S&P500 closed Friday less than 25 points from its new record of 5,111.

Class B shares of Warren Buffett's conglomerate Berkshire Hathaway climbed 5% premarket after the firm on Saturday posted a record $37.4 bln operating profit in 2023 as its insurance business benefits from improved underwriting.

Overseas, Japan's Nikkei set another record and helped MSCI's all-country index close to Friday's record too.

But China's stocks turned tail again - snapping a nine-day rebound - and with key business surveys watched closely later in the week.

China's President Xi Jinping held a meeting of a key economic policy body on Friday, the Central Financial and Economic Affairs Commission, to discuss support to manufacturers and lowering logistics costs, state media reported.

Companies have scuttled plans for initial public offerings in China this year as the securities watchdog tightens rules on share listings in a bearish market. Forty-seven pulled their listing plans from China's ailing stock exchanges so far this year, compared with 29 withdrawals during the same period one year earlier, data from stock exchanges showed.

Key diary items that may provide direction to U.S. markets later on Monday:

* U.S. Jan new home sales, Dallas Fed's Feb manufacturing survey

* Kansas City Federal Reserve President Jeffrey Schmid speaks; European Central Bank President Christine Lagarde speaks in Strasbourg

* World Trade Organization ministerial meeting in Abu Dhabi

* U.S. Treasury auctions 2- and 5-year notes, 3- and 6-month bills

* U.S. corp earnings: Zoom, Domino's Pizza, iRobot, AES, ONEOK, SBA Communications, Progressive, Fidelity National Information Services, Skywater, Everbridge, EverQuote, Freshpet, Kaspi, Itron, Playtika Li Auto, Krystal Biotech etc

(By Mike Dolan, editing by XXXX mike.dolan@thomsonreuters.com)

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